Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 18.90% to 19.19%, while operating margins improved from 4.24% to 5.51% over this period. For comparison, gross margins were 18.90% and EBITDA margins 4.24% in the immediate last period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

AFI-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 65.85, compared to last year’s level of 59.83 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a companyï¿½s cash versus earnings numbers to gauge whether its performance is sustainable.

AFI-US‘s year-on-year change in operating cash flow of 2.66% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The expansion in operating (EBIT) margins from 1.02% to 1.60% has also impacted the company’s earnings growth. However, one-time items have been a drag on the operating performance. As a result, the company’s pretax margins contracted from 1.21% to 0.97%.

Company Profile

Armstrong Flooring, Inc. engages in the production of resilient and wood flooring products. Its residential flooring products include hardwood, vinyl sheet, luxury vinyl plank and tile, vinyl tile, laminate and linoleum. The firm’s commercial flooring solutions include bio-flooring, hardwood, laminate, linoleum and luxury vinyl tile. Its products are primarily used in the construction and renovation of residential, commercial and institutional buildings. The company designs, manufactures and sells its range of products throughout North America and the Pacific Rim. Armstrong Flooring was founded in 2016 and is headquartered in Lancaster, PA.

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